Competitive Advantage and Value Creation
CHAPTER 7
COMPETITIVE ADVANTAGE AND VALUE CREATION
Contents
7.1 7.2 7.3 7.4 7.5 Creating Value Growth and Value Creation Competitive Advantage and Value Creation The Components of Value Overview
This chapter examines how companies create value in the market and how they capture it to increase the value of the firm. After completing the chapter, you will have an understanding of the connection between value creation and competitive advantage. Also, you will know the basic components of value and how value created is shared with customers and suppliers. The value created by the firm equals the benefits the firm’s customers receive minus the costs the firm’s suppliers incur and minus the costs of using the firm’s own assets. To increase value created, the company increases benefits to its customers, lowers costs of its suppliers, uses its resources more effectively, or combines suppliers and customers in new or more efficient ways. The firm’s ability to create and capture value depends on the strength of competition and the characteristics of the firm. In markets where customer demand outruns industry capacity, many firms can add value. In markets where industry capacity outruns customer demand, a firm must have a competitive advantage to survive. The firm must share the value that it creates with its customers and suppliers. The share of the value that the firm is able to capture is the value of the firm. Value-driven strategy involves three basic rules. To attract customers away from competitors, the company must provide sufficient customer value as compared to rival firms. To attract key suppliers away from competitors, the company must offer sufficient supplier value. To attract investment capital in competition with other market investment opportunities, the company must increase
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ECONOMICS AND MANAGEMENT OF COMPETITIVE STRATEGY © World Scientific Publishing Co. Pte. Ltd. http://www.worldscibooks.com/business/7171.html
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Economics and
COMPETITIVE ADVANTAGE AND VALUE CREATION
Contents
7.1 7.2 7.3 7.4 7.5 Creating Value Growth and Value Creation Competitive Advantage and Value Creation The Components of Value Overview
This chapter examines how companies create value in the market and how they capture it to increase the value of the firm. After completing the chapter, you will have an understanding of the connection between value creation and competitive advantage. Also, you will know the basic components of value and how value created is shared with customers and suppliers. The value created by the firm equals the benefits the firm’s customers receive minus the costs the firm’s suppliers incur and minus the costs of using the firm’s own assets. To increase value created, the company increases benefits to its customers, lowers costs of its suppliers, uses its resources more effectively, or combines suppliers and customers in new or more efficient ways. The firm’s ability to create and capture value depends on the strength of competition and the characteristics of the firm. In markets where customer demand outruns industry capacity, many firms can add value. In markets where industry capacity outruns customer demand, a firm must have a competitive advantage to survive. The firm must share the value that it creates with its customers and suppliers. The share of the value that the firm is able to capture is the value of the firm. Value-driven strategy involves three basic rules. To attract customers away from competitors, the company must provide sufficient customer value as compared to rival firms. To attract key suppliers away from competitors, the company must offer sufficient supplier value. To attract investment capital in competition with other market investment opportunities, the company must increase
217
ECONOMICS AND MANAGEMENT OF COMPETITIVE STRATEGY © World Scientific Publishing Co. Pte. Ltd. http://www.worldscibooks.com/business/7171.html
218
Economics and